There’s no doubt that semiconductors will continue to power technological innovations of the present and future.
The proliferation of personal computers (PCs), smartphones, and other consumer electronics are expected to keep advanced memory and processing chips in demand for years to come. Emerging technologies like autonomous vehicles and artificial intelligence (AI) are already driving the next wave of chip innovation.
In the near-term, however, the semiconductor industry may have to take a step backwards before resuming its growth trajectory. According to research from Gartner, semiconductor sales will slow considerably this year following extraordinary growth in 2021 driven by work and learn-from-home trends. Softer demand and pricing in a recessionary environment could spill over to a revenue decline in 2023.
Even with the long-term outlook still bright for chipmakers, the impact of inflation on consumer and enterprise spending has powered down industry share prices. After posting tremendous gains from 2019 to 2021, the PHLX Semiconductor Index (SOX) is down 34% year-to-date.
This puts the spotlight on margins for a space that has historically boasted some of the highest profitability metrics. Chipmakers with the highest margins could be in position to recover faster once demand and pricing start to improve.
What Semiconductor Company is Experiencing Strong Growth?
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) makes a wide range of products for hundreds of semiconductor producers. As the largest merchant fabricator in the world, it is known for its efficient operations and industry-leading margins. Through the end of last quarter, the company recorded a 41% net profit margin—a reflection of strong pricing power and diverse end market demand.
Lately much of the demand has come from data center computing, automotive, and Internet-of-Things customers. Chipsets for smartphones have also proven to be a source of resilient demand and also contributed to Taiwan Semi’s Q2 earnings beat. Yet after a brief rally, the stock has flatlined in anticipation of a tougher road ahead.
You wouldn’t know it by management’s forecast for sustainable annual sales growth north of 20%. As global chip shortages ease, holiday demand for 5G device inputs and other growing segments could produce impressive earnings growth over the next couple quarters—and give Taiwan Semi a big head start on meeting its target.
Will NVIDIA Stock Recover?
It's been a rough stretch for NVIDIA Corporation (NASDAQ: NVDA) shareholders. Last week the stock slipped to a 52-week low following a weak second quarter report and regulatory scrutiny around products sent to China and Russia.
The good news is that weakness in the smaller gaming division that caused the disappointing quarter is likely to be temporary as customers press pause on restocking chip inventories. The adjustments needed to appease regulators’ security concerns will likely get made in due time, amounting to a transient burden on NVIDIA’s operating model.
As these pressures subside, NVIDIA’s 26% net margin should have the company and its stock on the road to recovery. Unaffected by the recent negative headlines are the chipmaker’s long-term growth opportunities in its core graphics processing business, AI data center, and automotive division. An $11 billion pipeline for automotive design should lessen a dependency on gaming and drive stronger profits by fiscal 2024.
Wall Street’s current forecast for FY24 earnings per share (EPS) is $4.51. This would mark an improvement over the remarkable bottom line from last year and represent 33% growth from the down year expected in FY23. As we saw in late-2018, short-term pain could again lead to long-term gain for patient investors.
What is Micron Technology’s Profit Margin?
Micron Technology, Inc. (NASDAQ:MU) has a 31% net profit margin over the trailing 12 months. It also has delivered one of the strongest return on equity (ROE) metrics in the semiconductor industry at 22%. The solid profitability metrics stem from Micron’s status as the nation’s biggest memory chip company. It offers a range of memory solutions for PC, telecom, and industrial customers at prices that create a substantial cushion above operating expenses. The memory area of the semiconductor space is known for its pricing volatility, but it is a risk that Micron has managed fairly well over the years.
The stock is on sale mainly due to macro concerns. A slowdown in consumer spending is expected to reduce demand for desktop, laptop, tablet, and smartphone memory chips. Supply constraints and Covid lockdowns in China have created an even more challenging backdrop.
But it is a rough patch that Micron is likely to get through in part by leaning on strength in the data center businesses. Although management is cautious about the unfavorable demand and supply dynamics it is seeing in other end markets, it recently signaled optimism about demand for its memory and storage products over the long haul.
Earnings are projected to decline significantly in Micron’s new fiscal year. But with the stock trading around 6x trailing earnings and offering a recently raised dividend, the value is there for long-term investors.